The recent crisis in Andhra Pradesh related to microfinance has brought to the fore the simplistic notions that the a number of financial sector players seem to have about the nature of the crisis. Conspiracy theories abound about the causes for the crisis. Proponents of the microfinance sector seem intent on blaming everybody else, except themselves. The latest is Vinod Khosla, the renowned Venture Capitalist based in Silicon Valley, California, USA. Khosla is reported to have claimed that politicians are ruining the MFI sector for their own gains. Vinod Kholsa, and other probably seem to need to take tour of the villages of AP where SKS' (where they invested) actions would make Shylock blush. Those who have conducted field survey's are shocked with the nature of collection methods used by SKS. One person observed "SKS' staff donot even wait for two minutes, leave alone days, if there is a delay in repaying the loan". It is probably time for private equity to revisit their notion that "microfinance is the best thing that has happened to the poor in decades". But beyond a point, we cannot blame him: after all, that is probably what happens when you look a business model through the prism of Silicon Valley and the Stock Markets (both of which have difficulty looking beyond the immediate three months).
Any field survey in Andhra Pradesh in the aftermath of the recent Microfinance crisis would highlight a number of important, albeit dangerous trends, in not only the economic sphere but also in the realm of social relations. The growth of the NBFC microfinance organisations seems to be gradually altering social relations in a manner that is not in the long-term interests of the local community. NBFC microfinance companies have grown by practicising a business model that is based on peer-pressure and practices that are completely impersonal in nature. Both these are practices that have generally speaking, not done well in other contexts, especially in the sphere of moneylending and banking. The traditional characteristics of a banker (and moneylenders) are considered to be ones that are based on maintaining a low profile, staid and maintaining personal relationship with the clients, while constantly assessing the financial health of the client. By nature, they are (at least were in the past) extremely cautious. Robert Frost summed up this nature of the bankers of the bygone: 'a bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain'. The success of the informal moneylenders is often due to their intricate understanding of the local economic and social dynamics of the community where they operate. Unfortunately, the MFIs of the present seem to have none of the positive business characteristics, even if we were to be convinced about the inherent enlightened self-interest in their mind.
Transcripts of field surveys provide valuable insights that are a far cry from the public claims made by the MFI which claim that their activities enable the upliftment of the poor, expand and facilitate financial inclusion, global best practices, etc. Field based interviews of the victims of microfinance in Mahabubnagar District of Andhra Pradesh indicate that the MFIs do not really care about the cause for borrowing, though officially they call claim that they are lending only for productive purposes. It is claimed that they are lending money that is mostly (90% of the time) used as working capital in the petty commodity production in the non-formal enterprises. It is a standard practice that the agents of the microfinance company visit a village, go around asking people if they want a loan. In case borrowers are interested then they have to form a group and the company then appoints a 'leader' through whom, the loans are disbursed. The first loan size that varies from Rs.6000-10,000 and once this loan is repaid then they increase the loan size, usually in multiples of Rs.10,000. Once the first loan has been repaid, the business dynamics undergo a major change. Whatever little caution exists, is thrown to the wind. Credit is freely distributed, Either they have give a smaller loan than the outstanding (popularly referred to as 'Pilla loan' - verbatim: which may be literally translated into, meaning kid/child loan. The larger previous loan is referred to as 'pedda' loan, or bigger loan). The interesting aspect the borrowers disclosed, was that the loans were taken by members in the names of the women folk, usually for onward use by the male members of the family. This would probably mean that the statistics related to the economic empowerment of women may have to taken with more than a pinch of salt. However, there is need for greater clarity on this issue.
The other valuable insight is one that concerns the use of peer pressure and what it may be doing to the social relations in the local community. The reason why the microfinance companies claim to have a 99 per cent loan recovery is due to the use of peer pressure. Interestingly, the AP refutes the claim of 99 per cent repayment record and has pointed out in its submission to the RBI appointed Y.H.Malegam Committee (Download the submission) that the MFIs are actually disbursing New loans to borrowers so that they can repay the old loans - a common practice in the case of the banking sector. There is a term that bankers often use for such tactics: 'ever greening'. In that way there is theoretically no default though the size of the loan keeps increasing.
If one member of the group does not pay then the collective liability of the group invariably means that all the other members have to repay the loan. The next best thing that the remaining members of the group, which most of the time are part of the same social circle, can do is to go to the house of the borrower who is unable to repay and press the defaulter to pay. Since it is member of their social circle who are pressing the defaulter, they have two options, either to repay the loan by disposing any assets that they have or to simply pack their bags and leave the village. Those with property would find it difficult to leave the village and hence would have to either dispose their property or if they are unwilling then it could lead to tensions in the family. The rise of such tensions may have played an important part for those who committed suicide. The case of Ch.Hari in Atmakur Mandal who committed suicide is instructive. He had borrowed nearly 40,000 from three different MFIs and his weekly installments to the three MFI cumulatively add up to about Rs.3,000. His mother claims that he used to earn about Rs.300 a day and was regular in payment of the installment. Unfortunately due to some health reasons he could not work for about a month. He went to Bangalore in search of employment. His brother's wife and her extended family were the other members of the group. When Hari fell behind on repayment, his sister-in-law's family members went to Hari's house and started abusing him. Hari sought help from his mother and asked her to dispose their house and loan him the money. They refused and instead offered him a loan of about 3,000 Rupees, which would suffice the dues to the MFI. However, the MFI's representatives refused to accept the installment and instead demanded complete loan pre-payment. Hari's mother claims that unable to bear the social pressure he consumed suicide even as the ruckus was taking place outside his house. Ironically, the loan would have been repaid in another four weeks.
An MFI employee is involved in the activities of a set of groups only for a period of eleven months, ostensibly in order to see to it that they do not develop personal relations with the borrowers. They are usually transferred to either another branch or they are simply asked to coordinate the activities of other groups in a different set of villages/groups. Needless to say they are expected to fulfill credit disbursement targets.
The AP government has already decided to introduce of technology initiatives as part of the regulatory measures package. They have introduced a website that would have all details of the nearly one crore borrowers and any MFI would have to update the loan sanctions in that site, thereby providing real time information about to lender. Any lender who continues to borrowers, beyond the maximum of two loans, will be penalised. The Principal Secretary of Rural Development, R.Subrahmanyam, IAS, who has played a proactive role in order to help the borrowers, points out that the state also has tried the smart card solutions in order to help the consumers, but they have not reached all the poor in the state, and hence it could take more time.
Transcripts of field surveys provide valuable insights that are a far cry from the public claims made by the MFI which claim that their activities enable the upliftment of the poor, expand and facilitate financial inclusion, global best practices, etc. Field based interviews of the victims of microfinance in Mahabubnagar District of Andhra Pradesh indicate that the MFIs do not really care about the cause for borrowing, though officially they call claim that they are lending only for productive purposes. It is claimed that they are lending money that is mostly (90% of the time) used as working capital in the petty commodity production in the non-formal enterprises. It is a standard practice that the agents of the microfinance company visit a village, go around asking people if they want a loan. In case borrowers are interested then they have to form a group and the company then appoints a 'leader' through whom, the loans are disbursed. The first loan size that varies from Rs.6000-10,000 and once this loan is repaid then they increase the loan size, usually in multiples of Rs.10,000. Once the first loan has been repaid, the business dynamics undergo a major change. Whatever little caution exists, is thrown to the wind. Credit is freely distributed, Either they have give a smaller loan than the outstanding (popularly referred to as 'Pilla loan' - verbatim: which may be literally translated into, meaning kid/child loan. The larger previous loan is referred to as 'pedda' loan, or bigger loan). The interesting aspect the borrowers disclosed, was that the loans were taken by members in the names of the women folk, usually for onward use by the male members of the family. This would probably mean that the statistics related to the economic empowerment of women may have to taken with more than a pinch of salt. However, there is need for greater clarity on this issue.
The other valuable insight is one that concerns the use of peer pressure and what it may be doing to the social relations in the local community. The reason why the microfinance companies claim to have a 99 per cent loan recovery is due to the use of peer pressure. Interestingly, the AP refutes the claim of 99 per cent repayment record and has pointed out in its submission to the RBI appointed Y.H.Malegam Committee (Download the submission) that the MFIs are actually disbursing New loans to borrowers so that they can repay the old loans - a common practice in the case of the banking sector. There is a term that bankers often use for such tactics: 'ever greening'. In that way there is theoretically no default though the size of the loan keeps increasing.
If one member of the group does not pay then the collective liability of the group invariably means that all the other members have to repay the loan. The next best thing that the remaining members of the group, which most of the time are part of the same social circle, can do is to go to the house of the borrower who is unable to repay and press the defaulter to pay. Since it is member of their social circle who are pressing the defaulter, they have two options, either to repay the loan by disposing any assets that they have or to simply pack their bags and leave the village. Those with property would find it difficult to leave the village and hence would have to either dispose their property or if they are unwilling then it could lead to tensions in the family. The rise of such tensions may have played an important part for those who committed suicide. The case of Ch.Hari in Atmakur Mandal who committed suicide is instructive. He had borrowed nearly 40,000 from three different MFIs and his weekly installments to the three MFI cumulatively add up to about Rs.3,000. His mother claims that he used to earn about Rs.300 a day and was regular in payment of the installment. Unfortunately due to some health reasons he could not work for about a month. He went to Bangalore in search of employment. His brother's wife and her extended family were the other members of the group. When Hari fell behind on repayment, his sister-in-law's family members went to Hari's house and started abusing him. Hari sought help from his mother and asked her to dispose their house and loan him the money. They refused and instead offered him a loan of about 3,000 Rupees, which would suffice the dues to the MFI. However, the MFI's representatives refused to accept the installment and instead demanded complete loan pre-payment. Hari's mother claims that unable to bear the social pressure he consumed suicide even as the ruckus was taking place outside his house. Ironically, the loan would have been repaid in another four weeks.
An MFI employee is involved in the activities of a set of groups only for a period of eleven months, ostensibly in order to see to it that they do not develop personal relations with the borrowers. They are usually transferred to either another branch or they are simply asked to coordinate the activities of other groups in a different set of villages/groups. Needless to say they are expected to fulfill credit disbursement targets.
The AP government has already decided to introduce of technology initiatives as part of the regulatory measures package. They have introduced a website that would have all details of the nearly one crore borrowers and any MFI would have to update the loan sanctions in that site, thereby providing real time information about to lender. Any lender who continues to borrowers, beyond the maximum of two loans, will be penalised. The Principal Secretary of Rural Development, R.Subrahmanyam, IAS, who has played a proactive role in order to help the borrowers, points out that the state also has tried the smart card solutions in order to help the consumers, but they have not reached all the poor in the state, and hence it could take more time.
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